Brexit and stamp duty hitting housing starts, report says

New housing starts were down by a third in London last year due to Brexit and the introduction of the stamp duty premium on second homes, according to a new report.

The London Development Design Study by Knight Frank, Core Five and architecture practise MSMR reported that new housing starts fell from 25,200 in 2015 to 17,070 last year.

The drop in development activity is also being blamed on rising construction costs, which is being affected by the weaker pound since the Brexit vote.

A 10% movement in the value of the pound can shift the construction cost of a project between 2% and 4%, the report said, adding that up to 35% of the total construction cost of a high end residential development can be directly exposed to exchange rate fluctuations.

Currency movements can greatly affect the fit out element of a residential project as bathrooms, kitchens, as well as floor and wall finishes and mechanical and electrical equipment is sourced overseas, generally from Europe.

In recent years fit out costs of new homes have averaged between 10% and 15% of blended sales values, the report said.

Meanwhile, a survey of Knight Frank’s buyers showed that specification was an important factor in property purchases and 64% said they would pay a higher price for a property with higher quality finishes and appliances.

For developer finding a balance between the additional cost associated with higher specification against the price premium for purchasers is essential and means focusing on quality rather quantity. Developments need to strike a balance between short-term trends, technology and pragmatism, the report said.

Chris Amesbury, partner at Core Five, said: “More than ever, the challenges of the current market have brought viability into sharper focus. They demand the team truly understands the relationship between cost and value.

“Over the past 12 months, rising construction costs and uncertainty following the UK’s decision to leave the EU have weighed on development appraisal viability. The industry continues to face rising materials and labour costs while capacity is returning to the contracting market.

“Often quality aspirations and the hard reality of budget availability are misaligned at the start of a project. At best, this drives inefficiency in project development as teams frantically seek to cut cost. At worst, it creates a highly restrictive base which is impossible to mould into a commercially viable scheme. Here we demonstrate that by working collegiately, and relentlessly focussing on what truly drives value, these challenges can be overcome.

“High ceilings, for example, are hugely desirable and can give a scheme significant competitive advantage. Increasing ceiling height means spending more on the construction of a building, however, if this can deliver significant value whilst delivering the same amount of development, within a managed cost uplift, this may produce a benefit to the overall scheme viability.”